Fed Governor Adriana Kugler Talks Monetary Policy Outlook
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Bloomberg Audio Studios. Podcasts. Radio. News. We're coming here to Iceland, Reykjavik, where we're delighted to be joined by Governor Adriana Kugler. Governor Kugler, thank you for joining us. Look, there's been a lot of talk about central bank independence, Jay Powell under attack many times by Donald Trump saying, look, that actually the Fed did not cut. How do you think and how would you explain to the markets and maybe the president of why we're currently in a wait-and-see mode for the Fed?

Thank you Francine for having me here. And so let me tell you a little bit. Obviously we held steady at 4.3% and I supported that because the way I think about it is that our policy rate is currently moderately restrictive.

And I think it makes sense to keep it that way. And it makes sense to keep it that way for a number of reasons. First of all, we have been seeing the progress on this inflation slow down a little bit.

We have also seen an increase in inflation expectations and we want to keep long run inflation expectations very well anchored. So that's the second reason. Third, we see some risks, upside rates to inflation from the tariffs that are currently in place and given that it makes sense to make sure we keep again the federal funds rate moderately restricted.

On the real side of the economy, on the other hand, things have remained resilient. The employment rate is still high and the unemployment rate is still currently at historically low rates. And by the same token, private activity is judged by PDFP, the private domestic final purchases.

shows us that private activity grew at 3%. We saw some conflicting evidence between imports and inventories, but overall we see health still in the real economy. So that gives us time to make sure that we continue to make progress on inflation and we keep our inflation expectations very well anchored.

Governor, how problematic are the uncertainty actually of the tariffs to look at scenarios for GDP inflation and rates? So do you look at scenarios or do you look at baseline projections? Yeah, thank you for asking that. We look at a broad range of scenarios, in fact, because it is particularly important during this time period of a lot of uncertainty. Uncertainty is the word of the day, as you know.

And so the way we see it is that we don't know which way this is going to go. We started at 2.6% effective tariff rate at the beginning of the year. It depends who you ask, but it's somewhere between 20% and 27% according to many analyses. And we do our own analyses, but also look at private sector analyses on this issue. So it's still very high. It may still change. It could come down.

because there could be negotiations or exemptions. It could go up some if additional tariffs get put into place. So we're not sure even about the magnitude of the tariffs. We don't know which products are going to be affected by the tariffs at this point. We have...

a baseline case, as you said, as to the ones that already have been implemented, but we don't know if that's going to change in the next week, in the next months, in the next year. So we're keeping close attention to many different scenarios and paying attention as to how that may affect the economy.

Obviously, that is the question of the day. How will it affect the economy, right? So, Governor, first of all, what's your main takeaway from first quarter GDP and how you see U.S. consumers behaving right now? Yeah, as I said, on the real side of the economy, what we got is GDP for the first quarter, so it's backward-looking.

And that backward-looking number is showing us exactly what one would have expected, which is a lot of front-loading. So front-loading of imports ahead of the tariffs. People trying to buy, both producers and consumers, trying to get those products before the tariffs get put into place. That showed up in a huge increase in imports.

And some increase in inventories, but not as much. So overall the GDP number showed some weakness, so 0.3%, minus 0.3%. But if you look at the private side on the other hand, you see a very resilient economy with 3% growth in PDFP, the private domestic final purchases part of the economy, which shows a resilient consumer and a resilient investor as well.

Now, if you look at some of the more real-time data, the picture could look a little different. We did see high retail sales, but if you ask the consumer what they think they're gonna do ahead,

There is a fall in consumer confidence and people are thinking, well, maybe we'll hold back. Investors are thinking, well, investment may come down because we don't know what is coming ahead and they're concerned about tariffs. And Governor, I mean, there's a lot of talk, of course, that employment will rise. You could also see tariffs actually putting inflation up.

So at some point, if it happens in the third quarter or the fourth quarter, if you have this employment going up but also inflation being pushed by tariffs, does a higher unemployment bring disinflation? Does it somehow make the job a little bit easier for the Fed? So there are two effects, right? One, upside risk to inflation and upside risk to unemployment or a slowdown in economic activity. You're right.

I think the way I think about it is we're already seeing, especially from surveys of manufacturers, some indications about tariffs putting upward pressure on prices, in particular in the cost of materials. Those costs already being passed on to the consumer. That's already showing up in those surveys, whether it's the ISM surveys, the surveys that are done by the regional feds.

So that's definitely showing up in the data and it's showing up in goods prices and goods inflation going up as well.

That's happening now down the road, you're right, there could be a slowdown. And that slowdown partly because of uncertainty, but also because real disposable income is going to fall. Also because the real value of financial assets may fall and that will decrease wealth. And so those two effects are going to push down aggregate demand.

In addition to that, I would point out that there could be reallocation of economic activity and a reduction in productivity. And that could come up if, for example,

new businesses or existing businesses start producing things that used to be produced by those abroad and then you're having lower productivity. That could put some potentially, some downward pressure on prices coming up from the other side. But it's not clear whether they'll exactly counteract each other. I would say one has to be cautious to think that that in itself is going to do the trick of getting prices back down.

Governor Adriana Kugler, thank you so much for joining us. Hiscox Small Business Insurance knows there is no business like your business. Across America, over 600,000 small businesses, from accountants and architects to photographers and yoga instructors, look to Hiscox Insurance for protection. Find flexible coverage that adapts to the needs of your small business with a fast, easy online quote at Hiscox.com. That's H-I-S-C-O-X dot com.

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